Think It's Time to Go Long?

08/26/2015 8:00 am EST


Mark Sebastian

Founder, Option Pit LLC

Despite the recent volatility in the S&P 500, option trader Mark Sebastian, of, doesn't think it is time to go long yet, in fact, he recommends a trade off the next rally that even surprises himself.

The answer is no. The table below shows six things:

1.  Points gains in the SPX has done since July 2002

2.  Points gained in the SPX has done, when in cash when VIX is 5 points over VXV

3.  Points gained in the SPX has done when in cash when VIX is 5 points over VXV or VIX is over 40 points.

The second set shows the above, only stopping at the end of 2012. I did this to take the latest bull market out of the equation (notably 2013) as we have gone through one of the longest straight up markets in history.

Date from CBOE
Click to Enlarge

The fact is that when VIX is high, and the curve is steep, the market is likely to go lower over the near term. It might pop Wednesday or Thursday,  but it likely will not last.  The VIX Futures curve is an even better indicator of bad things that might happen.  When M1 is over M2 and M2 is over M3 cash crushes long stocks...its not even close.

The Trade:

I can't believe I am saying this, but I would buy VXX on the next rally.

By Mark Sebastian, Blogger and Contributor,

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